Orora [ASX:ORA] Streamlines Operations with $1.78B US Business Sale

Orora Limited [ASX:ORA] has announced a major strategic shift today. The company is selling its North American packaging solutions business for A$1.78 billion to Vertiv.

The sale values the North American business at approximately 9.9 times its FY24 cash EBITDA.

The move sees Orora shed its diverse packaging portfolio. The sale includes its cartons, shrink wrap, and retail signage units. Instead, it has narrowed its focus to glass and can manufacturing.

Investors responded strongly to today’s news, sending Orora’s share price up nearly 8.5% to $2.71 in trading this afternoon.

This strategic pivot follows a challenging period for Orora. The company has faced headwinds since its $2.2 billion acquisition of French glassmaker Saverglass last year.

It’s also been on the defensive since it rejected a buyout offer from US private equity group Lone Star.

Despite today’s gains, its shares are still down by 6% in the past 12 months as the cost-of-living crisis continues to hit beverage sales.

Does this sale offer a good time to invest, and is the company now better positioned for growth?

Strategic Refocus and Debt Reduction

The sale today concludes Orora’s strategic review, which began in August, as its share price hit a 52-week low.

Its share price has struggled since a double-digit drop in April. The deep trench you can see above came from a disappointing trading update.

In the April update, investors saw the first signs of trouble for its Saverglassand North American division.

Earnings downgrades and weak sales in its high-end glasses saw it shave off 11% in forecasted sales for 2H24 versus the prior year.

It also showed its debt leverage climbing to 2.8x, a point of large concern for analysts who rewarded it with a series of downgrades.

That debt had been a sticking point in its valuation since its $2.2 billion buyout of French glassmaker Saverglass.

Then, in August it was revealed that Lone Star, Orora’s bidding rival in that deal, had approached It with an informal offer.

Lone Star is known for acquiring troubled businesses, and analysts have described the deal as ‘opportunistic’.

The offer had been enough to force a reaction from Orora execs, who began the review with the goal of ‘unlocking value for shareholders’. The biggest outcome of that was the sale.

Orora CEO, Brian Lowe talked up the transformative nature of this sale today, saying:

‘We are building a better, stronger, longer-lasting business that is more focused.’

The company plans to use the proceeds to reduce debt and accelerate investment in its core beverage packaging operations.

This includes bringing forward a $130 million expansion of its can manufacturing plant in Rocklea, QLD.

The expansion is slated to increase Orora’s can production capacity by about 13%, with the new line likely operational by 2026-27.

Lowe described this as a ‘high-returning’ project as it aims to strike a balance between reinvestment and debt reduction.

While Orora and Veritiv have reached an agreement, the deal still faces some hurdles. For the buyout to proceed, Veritiv requires clearance from regulators.

A termination fee of US$62.5 million applies if Veritiv fails to gain antitrust clearance.

Outlook: Focused Growth in Beverage Packaging

Orora’s decision to divest its US-based business represents a significant pivot to its strengths.

By dropping the struggling arm of its business, it looks like it has evaded Lone Star for now.

But beyond Lone Star, the strategic refocus was needed to deal with the many headwinds it faces.

The largest issue now seems to be its integration issues with Saverglass. French factories are notoriously prickly, and a slowdown in orders from major spirits clients hasn’t helped.

Saverglass, which is known for its high-end spirit and wine bottles, has faced serious headwinds in the past six months.

The rationale for the investment at the time was that premium brand goods were likely to outperform others in these tougher times. That has yet to bear out.

Beyond this, Orora makes about two-thirds of the Australian wine industry’s glass bottles. However, this has also underperformed as the cost-of-living crisis hit an already-down wine industry.

By focusing on glass bottles and cans, Orora is betting on its ability to capture growth in these markets as things turn around. It could work for them.

Overall, it should be a positive step for future earnings. The can division has shown strong resilience throughout the economic downturn.

However, questions remain about their ability to navigate competition and potential shifts in consumer preferences.

It seems their growth focus has been on younger consumers’ preference for the thinner 200ml cans. Who knows if that demand is durable.

As Orora refocuses, investors should closely watch its ability to execute those expansion plans.

The market has initially responded positively to this strategic shift. But the long-term success of Orora’s focused approach remains an open question.

What does today’s sell-off tell you about your investments.

For investors watching the Australian share market, today’s drop could be a warning sign. If not, then the latest GDP figures were a blaring horn.

Quarterly growth of only 0.2%. Household spending down, productivity down.

It was the sixth consecutive quarter of GDP per capita falling.

The only thing that was up… Government spending, again at record highs after seven straight quarters of growth.

And what are the results?

Look at your costs: Petrol is up almost 8%, power bills are jumping almost 20%, and groceries are up nearly 30%.

We could be seeing a rerun of one of the most devastating decades in Australian history.

Investors need to consider how to position themselves in challenging times.

We have created a free guide that could help you escape this inflationary crunch with your portfolio and savings intact.

Click here to learn how to access our free guide — your wealth may depend on it.

Regards,

Charlie Ormond

For Fat Tail Daily

With more than a decade of fintech experience, including stretches in critical roles at budding start-ups and tech titans like Microsoft, Charles is squarely focused on investment opportunities in emerging sectors. Interestingly, his academic foundation in zoology provides an unexpected edge! He applies his scientific training with his analytical mindset to figure out tomorrow’s winners and losers. While traditional institutions stick with ‘safe’ stocks, Charles goes straight for seismic shifts in crypto and AI. He’s an early adopter of both technologies.

Now he’s on a mission to empower everyday investors. He decodes groundbreaking developments in technology stocks before they grab mainstream attention. So, if you seek an unconventional perspective to help capitalise on what’s next in fintech, look no further.